Abu Dhabi's airline strategy lacks coherence

Etihad Airways Flight EY503 is welcomed with spraying water from two fire trucks as the flight arrives at John F. Kennedy Airport in New York October 26, 2006. REUTERS/Etihad Airways/Ray Stubblebine/HO

DUBAI, Oct 19 (Reuters Breakingviews) - Abu Dhabi has developed an unhealthy appetite for European airlines.

The UAE’s official national carrier, state-owned Etihad Airways, is eyeing a tie-up with Virgin Atlantic -- which is bidding for Lufthansa’s (LHAG.DE) bmi unit -- and mulling a 25 percent stake in Aer Lingus AERL.I being sold by the Irish government. Such deals may deliver tactical gains. But they would be a messy way to trying to catch up with rival Dubai-owned Emirates.

Etihad is in an awkward position, outdone by Emirates in terms of profile and passenger numbers. The eight-year-old Etihad flew 7 million passengers in 2010 with a 74 percent seat load factor. Emirates -- which is almost three decades old -- flew 31 million passengers at an 80 percent load over the same period. Its sheer scale means Emirates is often wrongly assumed to be the UAE national carrier.

There’s room for two large airlines in the tiny Gulf country. This is a global market, and the Gulf is a strategic link between east and west. Etihad doesn’t disclose its finances but says it’s on track to be profitable in next year. Operational growth has been impressive, driven by its 30 plus bilateral code-share agreements with other airlines. Emirates has roughly one third of that amount.

Any financial investment into Aer Lingus, or into Virgin to assist with its bmi ambitions, would mark a big strategic shift. European ownership rules limit Etihad to a minority stake. Indirectly funding a bmi deal and buying the Aer Lingus stake could cost around 600 million euros. But it isn’t clear what benefits this would bring. Ownership isn’t required to have a code-share agreement and there would be limited synergies, given fuel and staff are the two main costs. Nor is Etihad desperate for more of the landing slots held by each airline.

The industry is littered with failed minority investments by airlines into rivals. Singapore Airlines’ 49 percent stake in Virgin Atlantic, picked up in 2000, didn’t help it grow overseas and few analysts now attribute any value to the shareholding. Emirates sold its stake in Sri Lankan Airlines back to the operator last year for less than it paid. And Swissair’s buy-to-grow strategy in the 1990s helped to bankrupt the airline.

Emirates’ success has come from years of disciplined organic growth. Etihad’s search for strategic shortcuts is probably in vain.

CONTEXT NEWS

-- Abu Dhabi’s Etihad Airways is in talks with Virgin Atlantic to help the UK carrier with its bid for Lufthansa AG’s British unit bmi, two people familiar with the matter said on October 17.

-- The airline has also approached the Irish government to buy its 25 percent stake in national carrier Aer Lingus, the FT reported on October 17.

-- Bmi controls about 9 percent of the take-off and landing slots at Heathrow, the world’s second-busiest airport, second only to IAG-owned British Airways BA.L, which has around 43 percent of the slots.

-- The Irish government said last month it was considering selling its stake in the airline as part of a privatisation drive under its European Union/International Monetary Fund bailout.

-- Reuters: Etihad, IAG contact Irish govt on Aer Lingus-report

-- Reuters: Etihad may join Virgin’s bid for bmi -sources

-- For previous columns by the author, Reuters customers can click on

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)